Swedish inflation accelerates in November

Sweden's consumer price index (CPI) continued its climb in November, fuelled by ever-increasing housing and electricity prices, Sweden's statistics agency announced on Thursday.

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The inflation rate rose to 1.8 percent compared with 1.5 percent in October, while the CPI amounted to 306.58, with 1980 prices represented at 100, Statistics Sweden announced on Thursday.

Analysts had on average expected consumer prices to inch up another 0.15 percentage points in November instead of the actual 0.3 percent points to 1.7 percent, according to a Reuters survey. The inflation rate is the average change in consumer prices over the last 12 months.

The unexpectedly high inflation raises the probability that Sweden's central bank, the Riksbank, will pursue its planned increases to the repo rate, according to Fredrik Florica, interest rate strategist at Nordea.

"It is not alarming. However, it increases the upward pressure on the margin on the Riksbank," he said.

According to Florica, part of the component of the surprisingly high inflation rate were higher food prices.

Higher interest costs for owner-occupied housing, up 3.7 percent and price increases for electricity (2.2 percent) each contributed to a 0.1 percentage point increase in CPI growth since last month.

Higher prices for food and non-alcoholic beverages (0.6 percent) and gas prices (1.9 percent) also contributed 0.1 percentage points each to the CPI increase. However, while lower prices for international flights, down 22.3 percent, contributed to a 0.1 percentage point decline to CPI.

Nordea expects the Riksbank to raise the repo rate four times in the next year to 2 percent from the present 1 percent.

"It is to a large degree already included in current interest rates," said Florica.

Underlying inflation, according to the CPI with a fixed interest rate (CPIF) and CPI excluding household mortgage interest expenditures (CPIX), were 1.9 in November and 1.6 percent, both increasing by 0.2 percentage points. Monthly change in both cases was 0.2 percent from October.

The krona received a marginal lift from the news, while the interest rate on two-year government bonds rose a couple of basis points to 1.76 percent.

According to Olof Manner, Scandinavian interest director at the Royal Bank of Scotland, such movements on the market are mainly due to a trend of higher interest rates in the world this week.

"Above all, it applies to short-term rates in the euro zone and a sharp upward movement for long-term rates in the US. There are large flows. Swedish rates move with global interest rates, mainly the German ones. We will be stuck in this cycle for many years, " he said.

According to Manner, the market, if it were based on economic facts, would prefer Swedish government securities ahead of German ones right now.

"We need not borrow as much money," he said.

Manner noted that Prime Minister Fredrik Reinfeldt appears to be open to Swedish participation in additional aid packages for European countries in crisis. Sweden has already committed to multi-billion packages put together by lenders for support packages to Ireland, Iceland and Latvia.

This can also drive up interest rates, he believes.

"The less we help and finance Europe, the better our will our bonds will perform. Accordingly, interest rates will fall and the Swedish krona will strengthen," he said.